Focus on credit growth – or lack thereof – early in reporting season

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When reporting season kicks off on Tuesday, banks are expected to report continued deposit inflows, continued improvement in credit scores and a resumption of share buybacks that were largely halted during the pandemic.

But the great uncertainty this year – when credit growth will resume – may well provoke chatter.

Lending activity remains sluggish, in part due to low utilization of the line of credit by commercial borrowers who are struggling to hire workers and replenish their stocks. Another factor is the flow of federal stimulus spending, which pumps money to both businesses and consumers.

While some regional banks such as Providence, Citizens Financial Group of Rhode Island and Comerica of Dallas recently stated that their lines of credit are developing rapidlyAccording to Peter Winter, an analyst at Wedbush Securities, growth in real lending has not yet begun.

“I think the big question is what will be the catalyst for renewed credit growth?” Winter said. “If the credit pipelines are back to pre-COVID levels, why hasn’t it led to more credit yet?”

Industry observers want to hear from bank executives, in part because reports of when credit will pick up have been mixed. In April, CEOs of North Carolina-based Citizens and Charlotte, North Carolina-based Truist Financial, predicted a recovery in the second half of the year, while their colleague at PNC Financial Services Group in Pittsburgh was more cautious about the timing.

The situation in the largest banks in the country is just as grim. At an industry conference in Juneexecutives at JPMorgan Chase and Wells Fargo said their companies still saw little to no growth in commercial lending. A Citigroup executive said he expects to see an increase in credit card loans in the second half of the year, although he noted that the growth rate is due to excess liquidity in the system.

Federal Reserve data paint a vague picture. On a seasonally adjusted basis, total US commercial bank lending and leasing declined 0.4% in the second quarter of 2021 from the same period a year earlier.

In the consumer realm, auto lending remains a bright spot, rising 7.5% year-on-year in June, but credit card loans remained largely unchanged, according to the Fed. Commercial lending also remains tough, with commercial and industrial lending declining 15% year-on-year last month and commercial real estate largely unchanged.

Recruitment problems, excess liquidity and low inventory levels caused by supply chain disruptions are holding back demand for loans, says Jason Goldberg, an analyst at Barclays Capital. According to him, these factors make it difficult to predict the recovery of lending growth rates.

“Is this the second half of this year? Is it early next year? I’m not that smart, ”Goldberg said. “I just know that this is usually a lagging economic indicator and the economy is picking up steam, so at some point it has to follow.”

Other analysts agree with this. In a July 12 policy note, Piper Sandler analyst Scott Siphers said weekly trends in C&I lending were “not very good,” although the category looked “less bad” than in previous weeks. With such a low line load, he said, “even a slight rise from this bottom” could lead to “pretty good growth.”

“One can only guess if this improvement will start now, later in the second half, or in 2022,” Siphers wrote. “But we still believe everything is in place for a better rebound.”

Second-quarter end-of-period lending data could shed light on the timing of possible growth, Winter said. According to him, if growth at the end of the period is above the average for the second quarter, it will “lay the foundation” for growth in the second half of the year.

However, “the concern is that banks were talking about this big expectation of a significant recovery in the second half of the year, and we are not in the camp that you see it in,” said Winter, who predicts a decline in average loan size in the second half of the year. quarter, stabilization in the third quarter and a slight increase in the fourth quarter.

Industry analysts expect to see some positive trends in the second quarter’s P&L. They point out that the credit quality is good, which means that there should be more reserves. Second, more details on capital recovery plans are expected after the latest round of government stress tests showed that all 23 participating banks have sufficient capital to continue lending in a tough economic environment.

“Banks are not obligated to tell us their exact plans, but I think we will see a renewed buyout overall,” said Chris McGratty, analyst at Keefe, Bruyette & Woods.

And while the continued influx of deposits puts more pressure on banks’ margins as loans do not absorb all this liquidity, more deposits tend to increase net interest income.

“In general, you want to have more deposits than less,” Goldberg said.

Lending growth prospects may remain hazy, at least in the short term, McGratty said.

“It feels like the target is being pushed back all the time, so I would be somewhat surprised if we get news that credit growth is back,” he said. “We’re seeing signs of this, but we’re still seeing some headwinds as well, so I’m guessing they’ll be talking about the end of the year or next year.”



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